Skepticism Over Tarp Revamp for Small Banks

As large institutions race to repay government capital, the Treasury Department is offering smaller ones another chance to take the money.

Trouble is, those most in need of capital still cannot qualify for the Troubled Asset Relief Program, since they are too weak. And many of those strong enough to qualify want nothing to do with Tarp.

Treasury Secretary Timothy Geithner said Wednesday that over the next six months the department would extend more capital to banking companies with less than $500 million of assets, regardless of whether they are public, private, subchapter S corporations or mutuals.

Speaking at an Independent Community Bankers of America conference in Washington, Geithner said the Treasury would reopen the application process, since Tarp repayments are replenishing its coffers.

Banks can request capital equivalent to up to 5% of their risk-weighted assets. Originally the limit had been 3%.

Current Tarp participants with less than $500 million of assets also can reapply to get the higher amount, with an expedited approval process.

Though some bankers said they would consider applying, others scoffed at the idea.

"We wouldn't want any more," said Lawrence Ward, the president and chief executive officer of the $489 million-asset Heritage Oaks Bank in Paso Robles, Calif., which took $21 million of government capital just two months ago. "In fact, we're trying to figure out if we want to repay it."

Jaded community bankers nationwide complained that the Treasury has favored the very largest companies from the start — making mutual institutions wait months to even see a term sheet — and that this belated nicety does not win political points with them.

They also recoiled from the idea of the government as an investor, after Congress changed the terms of the original deal. "The biggest problem I have is the fact they have changed the rules so many times that as a chief executive officer of a company I have a very difficult time having a business partner in the form of the United States Treasury," Ward said.

Don Childears, the president and CEO of the Colorado Bankers Association, said that some community bankers had already been encouraged to withdraw their applications by regulators, and that some are angry at the Treasury for making them wait so long to participate initially. "For those who have showed interest, there is a real feeling that they didn't get any receptivity from the regulatory agencies."

Chris Wells, the president and CEO of the $497 million-asset Martha's Vineyard Savings Bank in Edgartown, Mass., said his mutual thrift applied for Tarp in November, but just heard back from regulators last week that the underwriting process was about to begin. Wells said he told them never mind.

"Like us, a lot of small banks will probably turn the money away," he said, citing the stigma, the government strings attached, the possibility of more strings, and the difficulty of deploying the capital in an ailing economy.

Several industry watchers said the Treasury would have to make bigger changes to Tarp to help those banks that really want — and need — the money.

"I think very few banks are going to benefit and take part in the program unless they also reconsider which community banks are eligible for Tarp capital," said Robert Klingler, a lawyer at Bryan Cave LLP in Atlanta. "Right now the requirement for a community bank to get Tarp is they have to be an A-plus student. Unless they say an A or B-plus student can also get it, it won't have a significant impact."

Mike Stevens, the senior vice president for regulatory policy at the Conference of State Bank Supervisors, said that as it stands now an institution needs to be viable without Tarp. "We believe that if an institution can prove to be viable with an investment, then they should be eligible as well."

Still, Willard "Chuck" Lewis, the president and CEO of the $250 million-asset One Georgia Bank in Atlanta, would not rule out increasing the Treasury's 3% investment in his bank to 5%.

"If we had an additional need for padding our balance sheet with government funding, to support potential writedowns on problem assets, absorb higher levels of nonaccrual loans and increase activity in our SBA lending group … then we may consider it," Lewis said.

Small banks like his also might want extra capital so they can bid on failed institutions or buy branches from those that are struggling, he said.

Steve Brown, the president and CEO of Pacific Coast Bankers' Bank in San Francisco, said that if his company qualified for the Treasury's new plan — with $682 million in assets, it is too big — he would consider taking an additional infusion.

"Given the ongoing stresses in the economy, that is something we would possibly take a look at doing," Brown said.

Brown, too, was skeptical about the prospects for widespread participation, saying that there will likely be debates among bank boards. But he called the Treasury's move "wholly positive."

"The door to Tarp was originally opened to bigger banks, then it opened wider and wider, but lately it seems like it has slammed," Brown said. "It is nice to see the opportunity resurface."

Even with the deadline extension, bottlenecks may remain a problem. "As far as we can tell, Treasury still has over 1,000 applications pending," Klingler said.

Unless the process speeds up, he said, "then the extension isn't absolutely irrelevant, but it is borderline."

"There are banks larger than that that I would consider to be community banks, and this leaves that group in limbo," he said.

Jeff Davis, the director of research at Howe Barnes Hoefer & Arnett Inc., said the Treasury initiative may be an acknowledgement that smaller banks are finding it harder to raise capital. Insiders feeling the effects of the economy cannot make personal investments, and the market for pooled trust-preferred securities, once a common way for community banks to raise capital, has dried up.

"This makes it easier for smaller banks to top off their capital tanks," Davis said.

Michael W. Clarke, the president and CEO of Access National Bank in Reston, Va., said his $700 million-asset bank, which turned away the initial offer of Tarp, is not small enough to qualify for the new offer. But he applauded the initiative. "I think it helps provide additional resources to stabilize the system," he said. "It's refreshing to see smaller banks get a little preferential treatment for a change."

Clarke said some small banks that did not apply for Tarp initially or rejected it might reconsider, especially if the recession is taking more of a toll than anticipated. "The economy is still weak," he said. "There still may be some surprises. This can help the industry absorb any surprises that are out there."

But Cindy Blankenship, the vice chairman of the $250 million-asset Greater Southwest Bancshares Inc. in Grapevine, Texas, and a past ICBA chairman, was more skeptical.

She said the Treasury announcement underscores how out of touch it is with community bankers.

"I was shocked by it," said Blankenship, who attended Geithner's speech. "Are there banks out there that still want the money?"

She reiterated ICBA's call for Treasury to bring in community banking advisors. "They don't understand community banking. They are from Wall Street. That's not a slam, but a fact. So when you have people inventing these programs, it would make a lot more sense if they asked for input," Blankenship said. "If they want to be helpful, they should ask what would help."